Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 20.3% over the past six months. At the same time, the S&P 500 was up 12.3%.
Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks we would avoid.
People (PPLI)
Market Cap: $2.91 billion
Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, People (NASDAQ:PPLI) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.
Why Do We Think PPLI Will Underperform?
- Sales tumbled by 7.2% annually over the last five years, showing market trends are working against it during this cycle
- Earnings per share have contracted by 18.6% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
People’s stock price of $39.30 implies a valuation ratio of 14.7x forward P/E. Dive into our free research report to see why there are better opportunities than PPLI.
Ibotta (IBTA)
Market Cap: $858.7 million
Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE:IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.
Why Does IBTA Give Us Pause?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.3% annually over the last two years
- Modest revenue base of $343.2 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Earnings per share have dipped by 22.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term
At $37.03 per share, Ibotta trades at 22.6x forward P/E. Read our free research report to see why you should think twice about including IBTA in your portfolio.
PAR Technology (PAR)
Market Cap: $792.1 million
Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE:PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.
Why Does PAR Fall Short?
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Negative returns on capital show management lost money while trying to expand the business
- High net-debt-to-EBITDA ratio of 10× increases the risk of forced asset sales or dilutive financing if operational performance weakens
PAR Technology is trading at $19.15 per share, or 17.5x forward P/E. Check out our free in-depth research report to learn more about why PAR doesn’t pass our bar.
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